Here’s a question we recently received at http://www.USTaxAid.com.
“I just received my taxes from my accountant. I own a Design and printing firm. In my corporate taxes the CPA did not deduct some major losses due to some customers going bankrupt. Specifically $ 4,000.00 + in Graphic Design Fees. No hard cost involved. She said since we are on and always have been on a cash basis that we cannot deduct those losses. What??? Why not? We did the work,billed the work and never got paid. Why is that not a loss that can be deducted from our bottom line profits. It’s a loss period. Thanks for your assistance.”
This is an area of accounting that can be very confusing for clients. Let’s go through this step-by-step, but first I want to say I’m sorry you got caught up in this.
Let’s say that you have a car that you want to donate to a charity. It’s worth $5,000 and an appraisal proves that. Do you get a charitable donation? Of course you do.
Now let’s say you take your neighbor’s car and donate it. Do you get a charitable donation? Of course not. In fact, you might get arrested for grand theft auto.
So the first rule to get a deduction is that you have to own whatever is being donated.
Of course, in thecase, nothing is being donated. Instead you’re looking for a deduction. The business was not paid for work done by the business. But, wait a minute. If there was no hard cost associated with it, there really was no loss by the business. You personally lost out on your time. You did work and didn’t get paid for it. But there was no loss to the business. You had donated work to the business, for which you were not paid. So the business didn’t own anything that it loss money on.
On the other hand, if the business wrote you a check for your time, it would be a deduction for the company. And it would be income to you. So assuming your business is a flow through entity, it ends up being a wash. (Salary is taxable to you and a deduction for the company.) So, in this case, there is no tax benefit to you either.
If you are an accrual-based taxpayer, you would pay tax based on the amount of your billings that month. It doesn’t matter what you collect. You pay tax on the fact that you’ve invoiced someone.
If you later find out some of the billing is not good, then you can take the write off. You have a deduction, but only because you’d first recognized that billing was income and subject to tax.
So, as unfair as it feels, you have worked for free in this case. You could write off your wages, but you’d have to first pay yourself those wages.
Remember if you hired a lawyer or other agency to help you collect, the fees you paid them will be deductible.